Investing in a Flows Driven World: Interview with Cem Karsan

Investing in a Flows Driven World: Interview with Cem Karsan

Excess Returns features Cem Karsan of Kai Volatility Advisors discussing financial markets and the global economy. The conversation explores geopolitical conflicts and their impact on markets, and covers topics such as options, market flows, risk, volatility, historical patterns, and AI as an investment theme. 

Timeline:

0:00 Introduction
2:00 Geopolitical events and market impact
8:12 Inflation, Fed actions, and market flows
14:00 Options positioning and market structure
23:45 Market outlook for late 2023 and 2024
30:18 Historical patterns around elections
43:22 Rise of passive investing and potential shifts
51:12 AI as a productivity driver and investment theme
59:00 Cem’s unique belief about investing
1:04:31 Closing thoughts

AI-Assisted summary with emphasis on Cem’s stock market thoughts:

1. Near-term outlook (next few months): The speaker sees a high probability (75-80%) of the market continuing to rise through the end of 2024 and into early 2025, driven by:
   • Seasonal factors (holidays, lower trading volume)
   • Options market dynamics
   • Potential reinvestment of gains from 2024
   • The upcoming U.S. election year (2024)
2. Election year impact: The speaker notes that election years, especially in populist periods, have historically been very positive for markets. He cites an average return of 21.5% in certain past election years.
3. Longer-term concerns: Despite the near-term bullish outlook, the speaker expresses concerns for the longer-term (beyond 2025), including:
   • Potential for higher inflation
   • Geopolitical risks (e.g., China-Taiwan tensions)
   • Structural economic changes due to populist policies
   • Possible end of the passive investing trend
4. Market risks: While generally bullish for the near term, the speaker notes there’s a “fat left tail” risk. This means that there’s a possibility of a significant market decline if certain negative events occur.
5. Potential regime change: The speaker suggests we may be entering a period characterized by higher inflation, populist policies, and potentially lower real returns in markets over the long term.
6. Active vs. Passive investing: The speaker predicts a potential resurgence of active investing, contrasting with the recent dominance of passive strategies.
7. Sector and style shifts: There are hints that value stocks and more traditional industries might perform better in the coming years.

It’s important to note that these are the speaker’s opinions and forecasts, and actual market performance can differ significantly from any predictions. As always, it’s advisable to consult with a financial advisor for personalized investment advice.